interactive.wsj.com
July 3, 2001
NASD Considers Disclosure Rules
For Analysts Who Tout Companies
By JEFF D. OPDYKE
Staff Reporter of THE WALL STREET JOURNAL
Those enthusiastic analyst recommendations investors read in Wall Street
research reports or hear when tuned into business television shows soon
may come with more-detailed disclosure.
In the latest attempt to address potential conflicts of interest, the National
Association of Securities Dealers has proposed mandating that analysts
disclose ownership in companies they cover and that brokerage houses
disclose definitively any investment-banking relationships. A brokerage
house also would be required to tell if its stake in a company being
covered is more than 5%; the NASD is asking whether the threshold
should be as low as 1%.
The NASD proposal would further require that analysts and other
brokerage-house employees disclose during TV interviews and other
public appearances whether they own the shares they discuss.
"Clearly, there is a lot of concern about
whether people understand the conflicts of
interest when analysts recommend stocks,"
says Mary Schapiro, president of NASD
Regulation Inc., the NASD's regulatory arm.
Though the subject of conflicts of interest for
analysts has been around for ages, the issue
has gained new prominence in the wake of last year's tech-stock
meltdown. Individual investors rushed into the market in the late 1990s on
the advice of ebullient analysts, often not realizing that analysts aren't
always as independent as investors might think, and many portfolios have
suffered as the widely watched indexes headed south. Recently, Congress
held hearings on this issue, while a securities-industry trade group
announced a set of so-called best practices that brokerage houses agreed
to follow.
All of this new information proposed by the NASD would have to be
displayed on the cover of every research report in a type size no smaller
than the "buy," "sell" or "hold" recommendation itself. The NASD realizes it
can't force TV and radio stations to air an analyst's disclosure, but both
CNBC and CNNfn said they already have policies in place that require
this.
"This rule supports what we've already done," says Bill Bolster, chairman
and chief executive of CNBC, a unit of General Electric Co. (Dow Jones
& Co., publisher of The Wall Street Journal and The Wall Street Journal
Online, provides news content to CNBC and is a co-owner with GE of
CNBC's TV operations in Europe and Asia.) CNNfn is owned by AOL
Time Warner Inc.
The Securities and Exchange Commission would have to approve any
proposal that emerges. Because of that, the agency will say only that it is
"encouraged by the NASD's attention to this important issue." Merrill
Lynch & Co., the nation's largest brokerage house and one of the top
investment-banking firms, declined to comment.
One of the biggest controversies centers on analysts' owning positions in
companies they cover. Under current NASD rules, analysts and brokerage
houses must disclose any ownership or any business ties they might have
with the company in question. That disclosure typically takes the form of a
generic boilerplate similar to what Merrill Lynch recently began posting on
the front of its reports: The firm "has or may have business relationships,
including investment-banking relationships, with the companies in this
report."
The proposal, if approved, would mandate that analysts say for certain
whether they own shares of a company. And, depending on the rule's final
structure, analysts may have to specify how many shares, too. Likewise,
firms would be required to disclose ownership of 5% or more of the
company. Ms. Schapiro says her "suspicion is that 5% is too high a
threshold." The NASD is asking in its proposal whether the limit should be
lower, "maybe even 1%," she says.
Depending upon how the rule ultimately is structured, it could create a
two-tiered reporting system in which brokerage houses must report
ownership interests of less than 5% while institutional investors and others
report positions only when they reach or exceed the 5% standard set by
the Securities Act of 1934.
On the investment-banking front, Ms. Shapiro said the agency is
considering requiring firms to detail the extent of its relationship with a
company -- whether it is underwriting, advisory or mergers and acquisition.
The NASD will take comments until Aug. 15 on the proposal from other
regulatory bodies, the industry, analysts, consumer groups, individual
investors and others.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
KJC |
